Avoiding cliff-hanger on Wall Street wish list

Investors to keep focus on Washington despite busy week of data

WASHINGTON (MarketWatch) — The week before Christmas, U.S. investors are unlikely to be gifted with a batch of strong economic reports.

The condition of manufacturers is projected to show slight improvement in November, but business remains slow. Consumer spending probably rose last month, though not enough to excite Wall Street. The best news is once again expected to come from the recovering housing sector. And yet the pace of sales and construction are still quite low by historical standards.

Against that backdrop, Wall Street will remain glued on talks in Washington to resolve the so-called fiscal cliff — the combination of tax hikes and spending cuts that take effect in January unless lawmakers end a budget standoff. Some economists warn the U.S. could sink back into recession unless the cliff is avoided. See MarketWatch's fiscal-cliff page

“It doesn’t matter much what the data does until we get signs that real progress is being made,” said economist Jeremy Lawson of BNP Paribas. “That’s in the past. People want to know what’s in the future.”

Manufacturing malaise

One snapshot of the health of U.S. manufacturers in December arrives Monday with the Empire State index compiled by the New York Federal Reserve. The survey of executives is likely to edge back into positive territory after a negative reading in October, according to economists polled by MarketWatch.

The more closely followed Philadelphia Federal Reserve index will be issued a few days later on Thursday. It’s also expected to rise, but perhaps not enough to signal expansion.

Similarly, orders for durable goods in November are expected to decline.

Manufacturers have been hurt by a global slowdown and softness in the U.S. economy. The threat of the fiscal cliff also appears to be holding back orders for durable goods and other expensive capital equipment. Federal Reserve Chairman Ben Bernanke said last week that the budget impasse is already harming the economy. Read more on Fed decision.

“Weak global economic growth and ongoing problems in the U.S. are likely to continue to weigh on the manufacturing sector in the months ahead,” said Joshua Shapiro, chief economist of MFR Inc.

The housing sector, meanwhile, has improved faster than a tortoise but slower than a hare over the past year as it recovers from its worst slump in the modern era. Construction on new homes is forecast to fall slightly to an annual pace of 863,000 in November from 894,000 in October.

The pace of construction in October was the highest level in more than four years, but annual housing starts topped 2 million just six years ago. Economists suggest housing starts would have to top 1.5 million annually to put the industry back on solid footing.

Sales of existing homes, for their part, probably rose a bit in November. Super-low interest rates, pent-up demand and a slowly improving economy are drawing more customers into the market. The National Association of Realtors releases the report on Thursday.

Spending vs. wages

Getty Images

Construction workers build a new home on October 24, 2012 in Miami, Florida. Housing starts hit a four-year high in October.

The highlight of the week is the consumer spending report on Friday. Consumer spending, which accounts for three-fourths of the U.S. economy, is projected to climb 0.4% in November.

Some spending that likely would have taken place in October was pushed into November because of the disruption caused by Hurricane Sandy. Strong auto sales in November will also pad the numbers.

The problem is, U.S. wages are not keeping up with spending or inflation. Disposable income, or the money left over after taxes, has risen just 1.2% over the past year while inflation has climbed at a faster 1.9% clip.

Unless they get fatter pay increases or businesses go on a hiring spree, consumers cannot spend money faster than their wages rise indefinitely. That would use up all their savings.

The slow growth in wages partly explains the choppy pattern of consumer spending — higher one month and lower the next — and grudging expansion of the U.S. economy. Consumers have repeatedly tightened their purse strings when their savings have fallen below certain thresholds.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.